UK employers report weaker hiring and pay growth in July

UK hiring intentions have fallen to their weakest since the COVID-19 pandemic, with starting pay growth slowing to multi-year lows, according to recent surveys from CIPD and REC. This significant softening in the British labor market, driven by rising employer costs and broader economic uncertainty, is a key focus for the Bank of England, especially given ongoing concerns among some policymakers regarding persistent domestic inflation despite a recent rate cut.

Analysis

Forward-looking indicators point to a significant cooling in the UK labor market, a critical development for the Bank of England's monetary policy outlook. A survey from the Chartered Institute of Personnel and Development (CIPD) reveals that hiring intentions among British businesses have fallen to their lowest level since the start of 2021, with only 57% of private sector employers planning to recruit in the next three months. This slowdown is attributed to rising employer costs from social security and minimum wage increases, as well as business reticence linked to planned changes in employment law. Corroborating this trend, a Recruitment and Employment Confederation (REC) survey shows that growth in starting salaries was the weakest since March 2021, signaling a deceleration in wage pressures. While this softening labor market supports the BoE's recent decision to cut rates to 4%, it occurs against a backdrop of a divided policy committee, where four of nine members recently voted against the cut, citing inflation concerns. The CIPD's finding that median pay increase expectations remain stable at 3% may not be sufficient to placate these more hawkish members, making the official jobs data, expected to show unemployment holding near a four-year high of 4.7%, a crucial upcoming catalyst.

Key Decisions for Investors

• The weakening labor market data strengthens the case for further Bank of England rate cuts, which would likely place downward pressure on UK gilt yields and the British pound.
• Investors should exercise caution with UK-centric sectors that are sensitive to domestic demand and employment costs, such as hospitality, retail, and recruitment services, which appear to face dual headwinds from slowing activity and rising expenses.
• Given the clear division within the Bank of England, traders should anticipate heightened volatility around upcoming UK inflation and labor data releases, as these will be pivotal in shaping near-term monetary policy expectations.